Some ratios are more useful for management, whereas others are better suited to the needs of outsiders, such as stockholders and bankers. What is an example of a ratio that is primarily suited to management use and why? What ratio is more suited to use by outsiders and why?
Most of the liquidity ratios are primarily suited to use by management. For example, the investor would not normally place major emphasis on the turnover of either inventory or receivables. On the other hand, turnover ratios must be constantly monitored by management. The stockholder will be very interested in both the dividend payout ratio and the dividend yield. A banker would rely partially on a company's debt service coverage in the past as an indication of its ability to repay a potential loan in the future.
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